Nearly all investors are now incorporating companies’ ESG reporting into their decision making processes, according to a new survey released by global professional services firm EY, but more than three quarters of investors believe that companies are cherry-picking the sustainability data they are disclosing, and that they will only provide useful disclosures when required by regulators.
According to EY, the survey highlighted significant disconnects, and some areas of alignment, between companies and investors in areas including long-term vs short term sustainability creation and ESG reporting.
For the new report, the EY Global Corporate Reporting and Institutional Investor Survey, the firm canvassed 1,040 company CFOs and senior finance leaders across 25 countries and 14 sectors, and 320 institutional investors from 23 countries across the banking and capital markets, insurance, and wealth & asset management segments, on their expectations and goals in relation to sustainability investment and reporting.
The survey found that nearly all investors (99%) utilize companies’ ESG disclosures as a part of their investment decision-making, and that the methods used have matured significantly over the past few years, with 74% reporting conducting a “structured and methodical evaluation of nonfinancial disclosures,” compared to only 32% in 2019.
Despite increased reliance on ESG reporting, however, most investors highlight significant gaps in company sustainability disclosure, with nearly three quarters (73%) saying that “organizations have largely failed to create more enhanced reporting, encompassing both financial and ESG disclosures,” and 76% responding that ““companies are highly selective in what information they provide to investors, raising concerns about greenwashing.”
Additionally, nearly nine out of ten investors (88%) said that companies only provide limited decision-useful ESG disclosures unless they are forced to by regulatory requirements.
Many companies admit that their ESG reporting has room for improvement, with barely half (54%) agreeing that they provide investors with relevant information on sustainability activity, and 41% saying that their current ESG reporting would not meet even basic assurance standards.
The survey found that investors and companies largely agreed on factors that caused challenges to the usefulness and effectiveness of current sustainability reporting, with both groups’ top responses including a “lack of supporting evidence and assurance to provide trust in the information,” a “disconnect between ESG reporting and mainstream financial information,” and “lack of information on how the company creates long-term value.”
Tim Gordon, EY Global Financial Accounting Advisory Services Leader, said:
“Businesses that are serious about securing trust and a reputation for long-term focus must ensure that sustainability is built into their reporting processes – systemically, strategically and rigorously. Only then will we see investor skepticism subsiding and businesses feeling that they’re being recognized for their efforts to become more sustainable.”
The report highlighted factors that may contribute to the expectations gap on sustainability reporting on performance, with more than half (53%) of respondents at large companies saying that longer-term investments in sustainability are impeded by short-term pressures they face from investors. Yet, while 78% of investors said that companies should make investments that address ESG issues relevant to their business, even if it reduces profits in the short term, only 55% of the company finance leaders agreed.
According to the EY report, the survey’s findings of a perceived shortfall of effective corporate reporting on ESG, and the misalignments between investor and company expectations on long-term value creation and sustainable growth could impeded the ability of organizations to access capital and progress on meeting sustainability goals.
Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader, said:
“What this survey shows is that businesses and the investors they rely on still have very different goals and expectations in relation to sustainability. But this is much more than a difference in perspective: It’s a disconnect which poses a real threat to the smooth running of capital markets and ultimately the fight against climate change.”